Clients often ask questions about the use of beneficiary designations in their estate planning. Beneficiary designations can be a convenient way to avoid probate in some situations. If an individual is named as a direct beneficiary on an asset, that asset passes automatically to that individual, regardless of the terms of the decedent’s Will, Trust, or other estate planning documents.
Your attorney will often recommend that you coordinate your Payable-on-Death (POD) beneficiary designations or Transfer-on-Death (TOD) beneficiary designations to follow the distribution patterns in your overall estate plan for the purpose of avoiding probate. Despite the convenience, however, there are several good reasons to consider alternatives to direct beneficiary designations.
1. When you name direct beneficiaries using TOD and POD beneficiary designations to transfer all of your assets directly to those named beneficiaries, there is no one in charge of settling your estate. Furthermore, naming direct beneficiaries means there is no funding mechanism so that the person in charge can pay for funeral and burial, medical bills, debts, and administration expenses.
2. If you have relied on TOD and POD beneficiary designations to transfer all of your assets on death, there is no legal method for handling the disposition of tangible personal property, such as household furniture and furnishings, personal effects of sentimental value, motor vehicles, RVs, and watercraft.
3. While using TOD and POD beneficiary designations avoids the need to have an executor or personal representative appointed, this means that there is no one with the legal authority to file final income tax returns for the decedent. A trustee of a revocable trust has this authority, and so does the executor or personal representative named in a Will. The personal representative named in a Will has no legal authority unless there is a probate proceeding which admits the Will to probate.
In addition to the potential complications above, there are unique complications with respect to Transfer on Death (TOD) deeds for the purpose of transferring real estate without probate.
1. A TOD deed designating multiple children will effectively transfer title of the real estate directly to those children without probate proceedings. While the ease of transfer is convenient, none of the children have a greater say in the maintenance and disposition of the real estate. This can leave children in an untenable situation if they disagree about the disposition of the property, such as whether to sell the property or whether to make improvements to the property to prepare it for sale; not to mention the expenses in maintaining the property in the interim. The TOD transfer of title would even make it legal for one of the children to move into the residence and live there, while refusing to sell the residence.
2. A TOD beneficiary designation often does not cover contingencies. What happens if the named beneficiary predeceases the owner? We might expect that a parent will change their TOD beneficiary designations if a child predeceases them; however, what if the parent is mentally incapacitated, or simply does not take care of it? There is no simple procedure for determining who the successor beneficiaries are for purposes of providing clear title to the real estate. In the event a predeceased beneficiary’s minor children become the successor beneficiaries, real estate cannot be transferred to them without cumbersome court proceedings, such as a guardianship. Going forward, the court would be involved in all transactions involving the real estate, including sale. Furthermore, there is no ability to hold assets for the minor beneficiaries once they become the age of 18.
3. If a TOD beneficiary is in a nursing home and receiving Medical Assistance (Medicaid) benefits, the automatic transfer of real estate to them will affect their Medicaid eligibility and, in all likelihood, cause a loss of benefits. Their proceeds from the sale of the property will likely have to be used to pay nursing home expenses.
Consideration of whether or not to use direct beneficiary designations is crucial to your estate plan. While it may work well in some situations, it is important to consider both the advantages and disadvantages and work closely with your estate planning attorney to avoid common pitfalls. When in doubt, seek proper legal advice before completing direct beneficiary forms to make sure your designations are consistent with your overall estate planning goals.
Family Planning for Long-Term Care
When an ill or older relative needs help with daily activities and personal care, selecting an at-home caregiver can be a worrisome task. Who will provide care? How will they be compensated? What if the older relative needs not just occasional, but full-time care? To alleviate these concerns, a growing number of adult children are becoming caregivers for aging parents.
Although many adult children or grandchildren feel a strong sense of duty to provide care for their loved one, being a caregiver can be extremely time consuming. Providing care to an aging parent may make it difficult for the caregiver to meet other commitments, and may even result in sacrificing employment in order to provide the necessary care.
While many individuals are willing to voluntarily care for a loved one without any promise of compensation, a growing number of families are entering into Caregiver Contracts. A Caregiver Contract is a formal agreement among family members to compensate a person providing care.
A Caregiver Contract has several advantages. In addition to providing financial resources to the family member doing the work, particularly where the caregiver has given up other employment, it assures other family members that caregiving is fairly compensated and describes the care and personal services that are expected in return for a specific amount of compensation. This can alleviate family concerns over who will provide care and how much money will change hands, as well as avoid potential misunderstandings over the loved one’s reduction in assets (and the amount of money that would otherwise be inherited upon death).
Such contracts are also a key part of Medicaid planning, helping to spend down savings so that the recipient of care might more easily be able to qualify for Medicaid benefits. More importantly, without a Caregiver Contract, payments made to a family member for providing care will be considered a “divestment” for Medicaid eligibility, resulting in an ineligibility period. While payments to unrelated third parties for caregiving and personal services are not divestments, caregiving provided by a relative is considered gratuitous absent a contract that meets certain requirements.
Under the Medicaid rules, all payments to relatives for care and services made within five years of an application for Medicaid will be considered a divestment, unless all of the following are true:
• The services directly benefited the individual applying for benefits.
• The payment did not exceed reasonable compensation (prevailing local market rate) for the services provided.
• If the total payment made to the family member is greater than ten percent (10%) of Medicaid’s Community Spouse Resource Allowance, the institutionalized person must have a written, notarized agreement with the relative. (This threshold will range from $5,000 – $11,922).
• The agreement must specify the services and the amount to be paid and exist prior to the time any services are provided.
In addition to the requirements under the Medicaid rules, a properly drafted Caregiver Contract should contain provisions regarding the type of care, location of the care, terms and frequency of compensation, length of the agreement, income tax reporting issues and provisions for modification or termination. Contracts, even with family members, are legal documents. It is important to get your attorney’s help in drafting the contract to avoid omitting important terms, to provide proper documentation, and to seek advice about qualifying for Medicaid in the future.